Blog.

(or: Hollywood still hates you)

Under a new deal between the two companies, Netflix users won’t just have to wait 56 days to rent Warner Bros. movies on DVD. They’ll have to wait 28 days to add the movies to their queues.

As if you needed another indicator, this new deal between Warner Bros. and Netflix highlights how completely out of touch Hollywood is.

Another clutch quote:

Under the companies’ previous agreement, users could add discs to their queues even before they went on sale. Warner executives apparently believed that policy made it easier for consumers to wait, confident that the discs would arrive eventually.

Being able to put them in my Netflix queue, long before the DVD was available, was the best way that I could ensure that I would remember the movie. I would eventually see it, and Hollywood would get paid something.

There is logic here, it’s simply faulty. In a previous world of limited choice I could probably count the number of movies I heard and cared about in any given year on one or two hands. Now, just in movies alone, I am overwhelmed with what I hear about and what I have access to.

Consider only new releases: I know for a fact that I’ll never get to the movie theater to see all of the movies that look interesting. Being able to put them in my Netflix queue, long before the DVD was available, was the best way that I could ensure that I would remember the movie. I would eventually see it, and Hollywood would get paid something. If I can’t do that, I’m much more likely to simply forget the movie ever existed, not count down the days until I can buy it. I think there was a time that tactic could’ve worked. I simply don’t think it does anymore.

Most importantly, by trying to run a business that did two things well, we inevitably were forced to make an endless series of compromises that resulted in us doing neither of them well. Our landing page and sign up flow had to accommodate two different paths. Our checkout process needed to handle two types of transactions. Our shipping process had to accommodate two different types of products (one that had to come back and one that didn’t). Our content system had to accommodate titles we could only rent, ones we could only sell, and ones where we could do both.

A follow up to my thoughts on the Netflix split from last week: Their former CEO and co-founder, Marc Randolph wrote an excellent post weighing in. The quote above comes from it, and you’ll want to read it in its entirety.

His take? Focus.

Randolph claims no insider-knowledge, so it’s just a theory, but I’d file it under educated guess considering his past ties to Netflix. His take? Focus. He thinks Reed Hastings wasn’t simply trying to spin things when he said that Netflix-proper wanted the freedom to focus solely on the streaming service and that it was a bold and gutsy move to do it when they did.

He makes a compelling argument and backs it using the example of Netflix’s original transition away from DVD retail (something I didn’t know about). I still wonder if there are some other ancillary reasons for the spin-off and I still expect Qwikster to be up for sale sooner than later, but the spin-off will certainly allow for the type of focus Randolph talks about.

By freeing our designers from having to create a sign-up flow that accommodated two types of business, we were able to cut out steps, clarify instructions and simplify the process. Conversion went up.

I’d not thought about it that way, but the entire exercise could be an incredible lesson in product design. Having two split sign-up paths has to increase sign-up attrition rate. Now think about companies that are trying to simultaneously pursue several models. The ability to sell one thing and sell it well is really attractive.

Netflix splits into two

If you’re a Netflix subscriber, or a member of the internet at large, you’ve probably heard the news already: Netflix is spinning off its DVD rental service into a separate company named Qwikster. You can read the letter from CEO Reed Hastings that was mailed to subscribers on the Netflix Blog

Unlike their recent price changes, this new move not only caught me by surprise, but doesn’t initially make sense.

As a consumer (and subscriber) this doubles my effort for what used to be a seamless, integrated service.

As a consumer (and subscriber) this doubles my effort for what used to be a seamless, integrated service. I now get billed separately, have to deal with two customer service departments, and two sets of policies that may, in time, conflict. Not only that, but when actually searching for movie I now have to search two websites, separately. I’ve always maintained two queues on Netflix, but it was very convenient to search for a movie, notice it was available for streaming and add it to that queue instead of the DVD queue.

I pride myself on having a bit of business savvy and it’s not often that a company I greatly respect leaves me scratching my head, so I’m trying to guess why Netflix would be willing to make such a bold move. I’ve got two theories:

#1 Sell while you’ve got something to sell

I think it’s no secret that Netflix doesn’t see a future in DVD rentals. They haven’t exactly made a secret of it. Just look at which part of their offerings is retaining the company name and brand. Hint: it’s not the DVD service. Hastings, in his letter today went so far as to say it this way:

“Most companies that are great at something – like AOL dialup or Borders bookstores – do not become great at new things people want (streaming for us) because they are afraid to hurt their initial business.”

The rational is that they need to split off DVD service so that they can focus on streaming service. I think there’s validity to this, but I wonder why the split needed to be so public? The services were already essentially split internally, so why split them formally? Why put your customers in some temporary pain? Other companies have made major transitions (Apple, for example) without formally splitting their business offerings into separate companies.

I wonder if the split is actually their exit strategy.

I wonder if the split is actually their exit strategy. Yes, companies that can’t shift focus don’t move into the future well, but Netflix has already demonstrated that it is focused on streaming and the future. Nobody questioned that, even before the price/plan restructuring, let alone this split. But what usually happens to companies that go through a large transition is that their old offerings become a drag on the company. They often can’t exit the business fast enough and go through a period where they lose money before shutting it down for good. What if Netflix, with this move into Qwikster is not only trying to avoid that scenario, but they’re trying to build a separate, currently-profitable company to make it attractive to potential acquirers? It would actually be a brilliant move, if they could pull it off. They sell off their DVD service, while it’s still successful, at for a financial windfall and use the revenue to fund continued development of their streaming offerings. Qwikster becomes a success story for them and, when the day comes in the next few years that the DVD service isn’t tenable, they don’t have it to anchor them down or distract them.

#2 Divide and conquer (Hollywood)

My other theory has to do with rights—the agreements Netflix makes with studios and production companies in order to rent DVDs and stream media. This is a grey are for me, I don’t know exactly how this works, so I’m making some top-level assumptions.

They make more money off of DVD rental agreements and they’re afraid of the scenario the music industry faces with streaming…

On the whole, Hollywood has been reluctant to embrace streaming rentals. They make more money off of DVD rental agreements and they’re afraid of the scenario the music industry faces with streaming: getting paid a paltry few cents for the streaming of an entire album. They’re happy with the status quo (always were and probably always will be) and have little incentive to change. I wonder if that hurts Netflix in negotiations?

It’s possible that now, in rights negotiations, Netflix can wipe the slate clean. Anytime a movie industry executive brings up DVD agreements as a reference point for streaming licensing Netflix can say: “that’s not relevant,” and actually, literally mean it.

It’s all business

I think my second theory, while it doesn’t hurt, still doesn’t seem to require such a drastic change. I also can’t see an angle where this is better for the consumer in the short-run (the short-run being as long as someone needs to rent a physical DVD because something isn’t available for streaming). So my money (literally, I have a very, very, small investment in Netflix stock) is in theory one.

Today, as a subscriber of Netflix, I’m unhappy. As a stockholder, I think I understand it and I’m guardedly-hopeful that it’ll work out the way they intend.